The Risk Content of Exports: A Portfolio View of International Trade

56 Pages Posted: 4 Jun 2010 Last revised: 26 Sep 2010

See all articles by Julian di Giovanni

Julian di Giovanni

Federal Reserve Banks - Federal Reserve Bank of New York; Universitat Pompeu Fabra - Department of Economics and Business; Barcelona Graduate School of Economics (Barcelona GSE); CREI and Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR)

Andrei A. Levchenko

University of Michigan - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: May 2010

Abstract

It has been suggested that countries which export in especially risky sectors will experience higher output volatility. This paper develops a measure of the riskiness of a country's pattern of export specialization, and illustrates its features across countries and over time. The exercise reveals large cross-country differences in the risk content of exports. This measure is strongly correlated with terms-of-trade and output volatility, but does not exhibit a close relationship to the level of income, overall trade openness, or other country characteristics. We then propose an explanation for what determines the risk content of exports, based on the theoretical literature exemplified by Turnovsky (1974). Countries with comparative advantage in the safe sectors or strong enough comparative advantage in the risky sectors will specialize, whereas countries whose comparative advantage in the risky sectors is not too strong will diversify their export structure to insure against export income risk. We use both non-parametric and parametric techniques to demonstrate that these theoretical predictions are strongly supported by the data.

Suggested Citation

di Giovanni, Julian and Levchenko, Andrei A., The Risk Content of Exports: A Portfolio View of International Trade (May 2010). NBER Working Paper No. w16005, Available at SSRN: https://ssrn.com/abstract=1612600

Julian Di Giovanni (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

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CREI and Universitat Pompeu Fabra ( email )

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Andrei A. Levchenko

University of Michigan - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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